Child Tax Credit Payments to Begin July 15

The first-ever monthly payments for the Child Tax Credit begin tomorrow, July 15, when the IRS will begin sending checks ranging from $250-$300 a month per child to eligible families with children ages 17 or younger. In addition to the Child Tax Credit, the American Rescue Plan Act (ARPA) has brought about some big changes worth noting for the Child Care Credit for 2021.

Child Tax Credit

For starters ARPA increased the Child Tax Credit from $2,000 to $3,000 for qualifying children who are between the ages of 6-17, and it increased to $3,600 for children under the age of six. Instead of having to wait until 2022 to take advantage of this credit on your tax return, the IRS will be sending out preemptive payments to taxpayers. This will be similar to how they sent out the stimulus payments (tax credits) during 2020. For each child under the age of 6, those eligible will receive $300 a month, and for children between the ages of 6 and 17, $250 will be sent. These payments will begin going out tomorrow on July 15 and will be paid each month till the end of the year. The remaining balance of the credit that was not paid out through these early payments will be claimed when you file your 2021 tax return.

Child Care Credit

ARPA has also created changes to the Child Care Credit for the 2021 tax year. The Child Care Credit allows you to take a credit for expenses paid related to the care of children under the age of 13 so that you can work or look for a job. This credit allows you to take 50% of eligible childcare costs up to $8,000 for one child and $16,000 if you have two or more children needing care. Previously in 2020 you could only take 35% of eligible childcare costs up to $3,000 for one child and $6,000 for two or more children. This means the max credit has went up from $1,050 for one child ($2,100 for two or more) to $4,000 for one child ($8,000 for two or more). The big game changer for this credit in 2021 is that it will be fully refundable. This means if you are a low-income family and only pay $2,000 in taxes then in prior years you could only take up to $2,000 in the Child Care Credit. However, for 2021 if you owe $2,000 in taxes and have a $5,000 Child Care Credit than you will be refunded the remaining $3,000. This means many low to middle class families who previously could not take full advantage of the credit due to having a low amount of taxes owed, will now be able to see larger refunds/lower tax liability for 2021.

There are many specifics around what expenses are eligible and what counts as a qualified child. Please feel free to reach out to one of our tax advisors to make sure you are prepared and are taking full advantage of the big changes coming in 2021.